Fletcher Building taps investors for capital, injects life into equity capital markets

The capital raising needs to serve as a signal to the manufacturing and home building company that its new guard must get its house in order. Picture: Britta Campion

Fletcher Building’s circa $NZ700m ($641.7m) capital raising will provide equity capital markets’ bankers with a boost going into the final months of 2024. But the raising also needs to serve as a signal to the belea­guered manufacturing and home building company that long-suffering shareholders have had enough and Fletcher’s new guard must get its house in order.

The raising comes as the company, which is listed in New Zealand and Australia, seeks to shore up its balance sheet and get a handle on its net debt to earnings before interest, tax, depreciation and amortisation.

This column understands fund managers were being asked to consider backing the raising at a price of $NZ2.40 per share, compared to a closing price in New Zealand of $NZ2.89. That represents a steep, almost 17 per cent discount to where Fletcher’s shares last traded on Friday across the Tasman and to where the shares closed on the ASX, when you convert the currency. Investors will be mindful that it’s a 12 per cent discount to the theoretical ex-rights price.

The capital raising’s final price will be determined at a Fletcher board meeting late on Sunday, as the company considers bids for the stock and how the allocation to existing and any new shareholders will proceed.

Investment bank Jarden is managing the raising after also being appointed in recent months to consider asset sales for Fletcher, including its residential and development division.

The Australian revealed on Friday that Fletcher Building was actively assessing strategic options, including tapping investors for capital in a deal that could be announced as early as Monday.

Some investors think that given Fletcher’s tumultuous run of late and its tenuous debt and leverage position, it should hold fire on divesting assets and risk being viewed as a distressed seller.

That feedback from shareholders prompted the company’s board and Jarden to change direction and lean into a capital raising.

It was also facilitated by an agreement last month between Fletcher and the Western Australian government relating to the rectification of plumbing failures in some homes in the state.

Fletcher outlined a $155m pre-tax provision relating to the issue, which will be booked in this fiscal year.

With that issue disclosed and accounted for, in some respects, a capital raising became a live ­option.

As an aside, the leaky pipes issue will linger, as it has led to a class action in the Federal Court. Fletcher and its subsidiary Iplex have vowed to defend the action.

Fletcher – which employs almost 15,000 people across NZ, Australia and the South Pacific – has operations spanning manufacturing, distribution, home building and construction and infrastructure projects.

It has, however, been riddled with poor performance and management upheaval, exacerbated by slowing housing demand, heightened competition and inflationary pressures across the ­industry.

Allan Gray managing director Simon Mawhinney. Picture: David Geraghty

Declining to comment directly on the capital raising or its details, Simon Mawhinney – managing director of Fletcher’s largest shareholder, Allan Gray – made a pointed statement to this ­columnist about the company’s predicament:

“The position they find themselves in is a combination of misfortune but also extreme capital misallocation and poor contract structuring,” he said on Sunday.

There’s no mincing of words there.

Investors will also be hopeful that NZ’s housing market is past the worst, given the central bank started cutting interest rates there last month.

New leadership is also known for taking the trash out and ruling a line in the sand.

It’s notable then that new Fletcher chief executive Andrew Reding commenced as a board director on August 22 and will take the reins as group CEO from September 30.

The raising provides some clear air, but Reding certainly has a mammoth task in navigating the path ahead.

The capital raising signals there are signs of life in equity capital markets for secondary raisings, even as the market for initial public offerings remains quite dormant. Fletcher’s transaction follows an equity raising last week by Auckland International Airport. It raised $NZ1.4bn in a transaction that was well supported by investors and covered not long after the deal was announced to the market.

Macquarie Capital and Jarden worked on that deal.

Equity capital markets activity is being buoyed by raisings to fund mergers and acquisitions and other secondary raisings in 2024, as sharemarket float activity remains in the doldrums.

The only sizeable float on the ASX this year was that of Mexican fast-food chain Guzman y Gomez.

As Fletcher prepared to outline the capital raising details in market disclosures, the heavy volume of shares traded ahead of the transaction on Friday will also probably pique the interest of the corporate regulator.

A large parcel of more than 15 million shares crossed the ASX, with a domestic long-only fund manager believed to be the buyer of at least some of that stock. That came as interest among short-sellers in Fletcher’s shares remains relatively high – close to 3 per cent, according to the Shortman website, which does not include data from the NZ exchange.

Short sellers typically borrow a stock and offload it with the view of profiting when the shares fall.

The regulator would want to ensure that if a hedge fund that was shorting the stock somehow learned of the capital raising ahead of time, it did not improperly trade on that information for financial benefit.

People watch

Citigroup Australia is weeks rather than months away from making a senior appointment to lead its banking, capital markets and advisory division, following the departure of Alex Cartel, who has joined Rothschild.

The firm is screening external candidates, making some of its rivals a little anxious heading into the final months of the year. The internal frontrunners for the role are thought to be head of real estate Ben Connolly and utilities and infrastructure stalwart Nick Forster.

In the past few years, Forster has been based in New Zealand as Citigroup sought to beef up its operations across the Tasman. Connolly is another longstanding Citigroup banker who was promoted to managing director in 2018.

It’s a key decision for Citigroup as it navigates a still tough investment banking market. It will want to ensure the appointment lasts longer than Cartel in the role, given he parted ways with Citigroup after just over two years in the position. He joined Citigroup more than four years ago and was handed the head of banking, capital markets and advisory baton in 2022 by Tony Osmond.

Over at Barrenjoey, the firm has quietly had several new senior hires start at the firm in recent weeks. Among them is Rob Jenkins, who began this month at the firm, and was most recently a managing director at Grant Samuel. Earlier, Jenkins had stints at National Australia Bank and Commonwealth Bank in structured and project finance roles.

Another senior hire is Will Mortimer, who joins as a Barrenjoey partner and head of structured finance, as the firm seeks to boost capability across its debt division. He was self-employed at Exemplar Capital from January this year and prior to that had an 18-year stint at Citigroup, according to his LinkedIn profile. Among his roles at Citigroup was head of global spread products, financing and securitisation.